Rule 89(4): The Zero-Rated Refund Formula, Term by Term

Rule 89 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.

An exporter under a LUT does not get its credit back. It gets a formula-determined proportion of it, and every term in the formula is defined.

Refund Amount = (Turnover of zero-rated supply of goods + Turnover of zero-rated supply of services) × Net ITC ÷ Adjusted Total Turnover. Where "Refund amount" means the maximum refund admissible; "Net ITC" means input tax credit availed on inputs and input services during the relevant period, other than the credit for which refund is claimed under sub-rules (4A) or (4B); "Turnover of zero-rated supply of goods" is subject to a 1.5 times cap; and "Adjusted Total Turnover" is the turnover in a State or Union territory, excluding the value of exempt supplies other than zero-rated supplies and the turnover of supplies for which refund is claimed under (4A) or (4B).

Net ITC

"Input tax credit availed on inputs and input services during the relevant period", other than credit for which refund is claimed under sub-rules (4A) or (4B).

Two things to notice.

Inputs AND input services. Unlike Rule 89(5) for inverted duty, the zero-rated formula includes input services. That is a significant difference, and it makes the export refund materially more generous than the inverted-duty one. Rule 89(5): the inverted duty formula →

Capital goods are excluded. Neither formula includes them. Credit on capital goods used to make zero-rated supplies is retained in the ledger and can only be used against future output tax.

"Availed during the relevant period" — so it is the credit taken in the return for the period, not the credit attributable to the export invoices. A month with heavy procurement and low exports produces a low ratio; the reverse produces a high one.

Turnover of zero-rated supply of goods: the 1.5 times cap

"Turnover of zero-rated supply of goods" means the value of zero-rated supply of goods made during the relevant period without payment of tax under bond or letter of undertaking, or the value which is 1.5 times the value of like goods domestically supplied by the same or, similarly placed, supplier, as declared by the supplier, whichever is less, other than the turnover of supplies in respect of which refund is claimed under sub-rules (4A) or (4B).

So an exporter whose export price exceeds 1.5 times its domestic price for like goods has the numerator capped at that multiple.

The provision targets over-invoiced exports designed to inflate a refund. It bites in practice on:

• exporters with no domestic sales of the same goods — where there is no domestic comparable, the cap is difficult to apply and the ICAI commentary treats it as inapplicable;
• branded or customised exports where the domestic equivalent is genuinely different;
• high-margin export markets where the price differential is commercial.

Where the cap applies, the exporter should be able to evidence the domestic price it declared, and why the export price is what it is.

Note that the cap applies only to goods, not services.

Adjusted Total Turnover

"Adjusted Total Turnover" means the sum total of the value of —

(a) the turnover in a State or a Union territory, as defined under s.2(112), excluding the turnover of services; and (b) the turnover of zero-rated supply of services determined in terms of clause (D) below and non-zero-rated supply of services,

excluding —

(i) the value of exempt supplies other than zero-rated supplies; and (ii) the turnover of supplies in respect of which refund is claimed under sub-rule (4A) or (4B) or both, if any,

during the relevant period.

The structure is designed to make the numerator and denominator comparable. Two exclusions matter:

Exempt supplies other than zero-rated. Removing exempt turnover from the denominator increases the refund ratio — which is correct, because credit attributable to exempt supplies has already been reversed under Rule 42.

Sub-rule (4A) and (4B) turnover. Removed from both numerator and denominator, because those supplies have their own refund route.

Turnover of zero-rated supply of services

Defined in clause (D): the value of zero-rated supply of services made without payment of tax under bond or LUT, calculated as —

payments received during the relevant period for zero-rated supply of services plus zero-rated supply of services where supply has been completed for which payment had been received in advance in any period prior to the relevant period minus advances received for zero-rated supply of services for which the supply of services has not been completed during the relevant period.

So for services the measure is receipts-based, not invoice-based — which aligns the refund with the actual realisation of foreign exchange.

Worked example

A month with:

• Export of goods under LUT — ₹80,00,000 (domestic like-goods value ₹60,00,000, so 1.5× = ₹90,00,000; the actual ₹80,00,000 is less, so no cap)
• Export of services — receipts ₹20,00,000
• Domestic taxable supply — ₹50,00,000
• Exempt supply — ₹10,00,000
• Net ITC — inputs ₹9,00,000 + input services ₹3,00,000 = ₹12,00,000

Adjusted Total Turnover = 80,00,000 + 20,00,000 + 50,00,000 = ₹1,50,00,000 (exempt ₹10,00,000 excluded)

Refund = (80,00,000 + 20,00,000) × 12,00,000 ÷ 1,50,00,000 = 1,00,00,000 × 0.08 = ₹8,00,000

Key takeaways

• Refund = Zero-rated turnover × Net ITC ÷ Adjusted Total Turnover.
• Net ITC includes input services — unlike the inverted duty formula — but excludes capital goods.
• Zero-rated turnover of goods is capped at 1.5 times the domestic value of like goods.
• Adjusted Total Turnover excludes exempt supplies other than zero-rated, which raises the ratio.
• Zero-rated supply of services is measured on a receipts basis.
• Sub-rule (4A) and (4B) turnover is excluded from both sides.

Read next

• Rule 89(5): The Inverted Duty Formula
• Rule 96A: LUT and the Fifteen-Day Consequence
• Export Refund: With-Payment and Without-Payment Routes
• Rule 89(2): The Documentary Evidence a Refund Needs

Disclaimer: Positions stated as on 5 September 2026, based on the CGST Rules as amended to 31 March 2026 (ICAI Bare Law, 12th edition) and the ICAI Handbook on Refunds under GST (January 2026).